PLUP Fiction: Not All Fraud is Sales Fraud

So far in this column, we have talked primarily about fraud committed at arms’ length by salespersons or investment advisors. These sorts of sales fraud are but two of the many flavors in the Cold Stone display of frozen, delicious deception. Today, we are going to look at a case of alleged fraud and bad faith claims by an insurance company against someone it insured.

Fraud and Bad Faith Claims? A Tragic Accident Leads to Litigation

Last month, the Indiana Court of Appeals found that a plaintiff named Kimberly Earl could pursue claims against her insurance company based on the insurance company’s allegedly deceptive concealment of a $2 million insurance policy.

The underlying facts are straightforward: Kimberly’s husband was hurt when a semi-trailer hit his motorcycle. The truck driver did not have insurance. Kimberly and her husband sued their insurance company for uninsured motorist coverage, and after they rejected a lowball settlement offer, won a jury verdict of $250,000. This was the maximum amount of coverage allowed under their uninsured motorist insurance policy. (Kimberly’s husband, sadly, passed away from causes unrelated to his accident prior to this verdict.)

After that trial, the insurance company revealed, for the first time, that Kimberly and her husband were also covered by a personal liability umbrella policy (“PLUP”). The PLUP provided an additional $2 million in coverage for the accident. The insurance company admitted that it should have disclosed the PLUP to Kimberly and her husband before the trial, but failed to do so. Following this disclosure, Kimberly sued the insurance company for, among other things, fraud and bad faith claims, and sought compensatory and punitive damages.

The PLUP provided an additional $2 million in coverage for the accident. The insurance company admitted that it should have disclosed the PLUP to Kimberly and her husband before the trial, but failed to do so.

She alleged that the insurance company lawyer either knowingly or recklessly deceived her about the existence and scope of the PLUP. She also alleged that because she had a prior relationship with the insurance company, the insurance company could not remain silent about the PLUP and was legally obligated to disclose that policy to her.

Can You Rely on What is Said, or Only on What is Read?

The insurance company argued that Kimberly could not have reasonably relied on its representations regarding the scope of her coverage because she had an obligation to read the underlying insurance policy and to understand it enough to figure out the difference between what the insurance company said and the language of her insurance policy. In particular, the insurance company argued that the PLUP was disclosed in the declarations listed on the first page of the policy.

…she reasonably relied on what the insurance company representative said to her

The Indiana Court of Appeals rejected this argument. The Court said that Kimberly could argue to a jury that she reasonably relied on what the insurance company representative said to her, without having to cross-reference the insurance policy. This ruling was based on, in part, the complexity of the policy.

The Court also emphasized that its holding likely would have been different if Kimberly and her insurance company had been “dealing at arm’s length.” In that situation, if she had disregarded a written document in favor of what she’d been told, she would have been “clos[ing her] eyes to the truth” and taking “a chance” that things would work out in her favor. However, because she was an insured of her insurance company, she “had every right to rely” on its “fraudulent misrepresentation of complex insurance coverage.”

Fraud and Bad Faith Claims Aren’t Always Different

Kimberly also brought a “bad faith” claim, which is yet another flavor of fraud. Under Indiana law, insurance companies have the obligation of “good faith and fair dealing,” which can be breached if they refuse, without basis, to pay out on a claim and deceive their insured about that denial. Such deception is called “bad faith.”

This is exactly what Kimberly alleged happened to her. The appellate court found that she had a viable claim. In particular, Kimberly alleged that the insurance company was chattering internally about her PLUP coverage during and immediately after her first trial, but did not disclose the policy to her. Internal documents appeared to support this allegation, and the Court found that a jury should decide whether the insurance company acted in bad faith.

Having won her appeal, Kimberly’s case will likely go back to the lower court for a trial on the fraud and bad faith claims, so the end has yet to be written. Stay tuned

Adam represents a wide variety of clients, ranging from individuals to small business owners to large corporations. He has a particular focus on business and investment disputes, and has experience litigating such disputes in numerous state and federal courts. He has also represented business clients in arbitration and mediation proceedings. Adam also represents employees in…